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Abstract: The study explores and examines the scope of Human Resource Accounting towards effective
management of Human Resources in the organization. As a phenomenon HRA attempts to valuate human
resources in the organization, while it’s implemented in several global organizations some organizations have
found the process beneficial and on other hand some have given away the concept of HRA in their accounting
procedures. This research attempts to find a suitable arrangement to benefit organizations in using this
methodology.
Keywords: Human Resource Accounting, Human Resources.
1. INTRODUCTION
Human Resource Accounting (HRA) is an approach for evaluating human resources that represents the current status of
human resources valuation concept; which currently being developed mostly in western countries. By helping
management identify and evaluate the human resources attributes that can make the firm more profitable, human
resources planning can also make a significant contribution to a business.
In recent years more and more organizations are beginning to extend their information resources by moving towards
systematic research which in essence, seeks new information about the functioning of the whole system in relation to its
changing environment. One example is the information gathered about the value of its human resources as an organization
moves through a period of technological and personal changes.
From an accounting point of view, all assets are economic values that should be charged to the operations of the periods
they benefit. This principle applied to the entire economic life of the assets involved. For that reason advocates of human
resource accounting believe that, the often significant costs incurred in recruiting, hiring, training and developing human
resources for the benefit of more than one period should, like any other asset of material value be indentified and charged
to the periods in which their benefit is felt. The upshot of all this is that such information can be of vital importance to
management for decision making and measuring the return on their present and future investment in human resources.
More effective planning and controlling efforts are then assured, particularly in labour intensive industries, in the
provision of professional services and in the relatively new but expensive specialties, such as system analysis and
programming.
2. HISTORY OF HRA
Since the 1960's, research, in this subject has primarily developed based on the human resources school of personnel
management. Flamholtz has specified five stages in the development of HRA, which are:
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a. From 1960 - 1966, this was marked by the derivation of HRA concepts from the economic theory of human capital,
then the new human resources school and organizational psychologists' focus on leadership effectiveness.
b. Between 1966-1971, this was identified as a period of basic academic research, measurement of models and
identification of potential user as well as some experimental applications in actual organizations.
c. From 1971-1976, this was a period of growing interest in HRA, exhibited by. both researchers and organizations.
The applications of HRA were mostly attempted by small entrepreneurial organizations. Assessments were also
made on the potential impact of HRA information to line manager and investor decisions.
d. Between 1976-1980, this was identified as a period of declining interest among accounting researchers and business
organizations. Flamholtz has attributed that interest in HRA has waned, possibly because the public accounting
standards- were too stringent to allow the direct reporting of human asset value in financial statements, the
preoccupation of business with other concerns and the lack of organizations preparation to sponsor HRA
applications research and expenditure.
e. Since 1980 and up to present, there has been a period of growing interest in HRA. This has been shown by
demonstration of new research studies and some attempts by major organizations to apply HRA. In United States,
interest has been accelerated by a focus on employee productivity. Some of Japanese Corporate has shown interest in
applying a new approach to their human resource (as lifetime assets rather than expenses). In Western economies
itself, there was a change of primarily industrial manufacturing to high technology service economies for which
human capital is a critical source.
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Efficiency Ratio = 5 +4 +3 +2 +1
15
Where RF0 = is the rate of accounting income on owned assets for the firm for the current year.
RE0 = is the rate of accounting income on owned assets for all the firms in the economy for the current year.
RF4 = is the rate of accounting income on owned assets for the firm for the fourth previous year.
RE4 = is the rate of accounting income on owned assets for all the firms in the economy for the fourth previous year.
The efficiency ratio measures the rate of effectiveness of the human resources operating in the given entity over a five
year period. A ratio greater than 1 implies that, the rate of return of the firm is above the average ratio of return for all
firms in the economy. The efficiency ratio has been criticised by certain authors as subjective because of arbitrary
weighting scheme and restricting the valuation period to five years only.
3. Stochastic Rewards Valuation Model:
The Flamholtz stochastic rewards valuation model identifies the major variables which determine the value of an
individual to the organisation. The model advocates that a person generates value for an organisation as he occupies and
plays different roles and renders services to the organisation. The movement of people from one organisational role to
another is a stochastic process. As people move and occupy different organisational roles they render service (rewards) to
the organisation. Based upon the above concept, a person‟s expected realisable value of an organisation can be measured
as the discounted mathematical expectation of the monetary worth of the future rewards (services) a person is expected to
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render to the organisation in future roles he is expected to occupy, taking into consideration the probability of his
remaining in the organisation.
4. Jaggi & Lau Model:
The model suggested by Jaggi and Lau is based on valuation of groups rather than individuals. A group implies
homogeneous employees who may or may not belong to the same department or division. It might be difficult to predict
an individual‟s expected service tenure in the organisation or at a particular level or position, but on a group basis it is
easier to ascertain the percentage of people in a particular group likely either to leave the firm during each of the
forthcoming period, or to be promoted to higher levels. In order to consider the role movements of employees within the
organisation a Markov Chain representation can be used. The model required the determination of Rank Transitional
Matrix and the expected quantities of services for each rank of service. The matrix can be prepared from the historical
personnel records of the employees available in the organisation. For the purpose of measurement of quantities of
services, certain service or performance criteria are used. The value of the services an organisation‟s current employee
render in a future period is computed by multiplying the estimated number of current employees that will be in each
service state in that period, by the value of the service an employee in each state (i.e. rank) renders to the organisation.
The equation for the computation of value of human resources of an organisation using Jaggi & Lau models is given
below:
TV = (N)rn (T) n(V)
Where, TV = Column vector indicating the current value of all current employees in each rank.
(N) = Column Vector indicating the number of employees currently in each rank.
n = time period r = Discount rate
(T) = Rank transitional matrix indicating the probability that an employee will be in each rank within the organisation or
terminated in the next period given his current rank.
(V) = Column vector indicating the economic value of an employee of rank 1 during each period.
6. CONCLUSION
The researcher has been able to identify the scope for further study wherein HRA can find its significant contribution in
Indian organizations, thus facilitating the overall economic development and organizational growth. The researcher
intends to conduct further study where HRA based competency valuation model will be designed. This model will further
benefit organizations in their performance measurement analysis, business allocation process and engaging &
empowering their human capital efficiently.
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REFERENCES
[1] L S Porwal, 2001, Accounting Theory – An Introduction, Third Edition, Tata McGraw-Hill Publishing Company
Limited, New Delhi, p 474 – 490.
[2] Shashi K Gupta and R.K. Sharma, 2008, Management Accounting – Principles and Practice, Eleventh Edition,
Kalyani Publishers.
[3] M A Sahaf, 2001, Management Accounting – Principles and Practice.
[4] Dr. Prashanth Makwana and Rakholiya Nisha Rasikbhai, (2012), “A Survey of Managerial Uses of Human Resource
Accounting”, Indian Journal of Applied Research, vol 2, Issue 3, pp 114-15.
[5] Syed Abdulla Al Mamun, (2009), “Human Resource Accounting (HRA) Disclosure of Bangladeshi Companies and
Its Association with Corporate Characteristics”, BRAC University Journal, vol VI, No 1, pp 35-43.
[6] Upasna Joshi & Reeta Mahel (2012), “HRA System in Selected Indian Companies”, vol 3, no 2, pp 69-76.
[7] S Kesavan & P Fathima Nancy Dyana (2013), “Disclosure of HRA in Selected Indian Companies – An Empirical
Analysis”, vol 3.
[8] Dr. Ankitha Chaturvedi (2012), “HRA and its effect on Organisational growth – A Case study of SAIL.
[9] Dr. S. Chand Basha, Dasari P Anduranga Rao, & Rajashekar (2013), “A Study on Human Resource Accounting
Methods and Practices in India”, International Journal of Social Science & Interdisciplinary Research, Vol 2.
[10] Ms. Gaganjit Kaur and Mr. Rajesh Chawla (2012), “Human Resource Accounting in Infosys”, Techno-Biz, vol 1.
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